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Parents with babies born after August 1 will only receive a £50 rather than a £250 Child Trust Fund voucher as the scheme is gradually phased out.

Child Trust Funds, first announced in the April 2003 Budget, were launched in January 2005 as a way of encouraging parents to save for their children.

Under the original rules, all children born on or after September 1, 2002 were eligible for a £250 voucher, with a further £250 paid at age seven. Those on lower incomes received higher payments of £500.

They will now receive just £100 and the vouchers will be stopped for everyone from January 1 next year, as part of the government’s spending cuts. Payments for seven-year-olds were stopped from August 1.

Here, we explain what the changes mean for parents wanting to save for their children’s futures and look at some alternative options...

My child already has a Child Trust Fund account, will I have to close it?

No. Existing Child Trust Funds will carry on as normal, so parents who’ve invested their children’s vouchers don’t need to take any action. If you already have an account in place, then you should try and make additional contributions whenever possible. You can pay up to £1,200 a year into the funds free of income and capital gains tax.

Top ups are well worth it. Parents who pay the maximum £100 a month permitted into their children’s Child Trust Funds, in addition to £250 vouchers at birth and age seven, could potentially expect a sum of around £40,000 when the child reaches 18, assuming 6% annual growth after charges.

I’ll only qualify for the reduced £50 voucher – where should I invest it?

The vouchers can be invested in cash, stocks and shares, or stakeholder accounts, which invest in stocks and shares in the first few years and then move into less risky investments, such as cash and bonds, as the child nears the age of 18.

You need to choose which type of account you want, so think carefully about how much risk you want to accept. Whichever option you go for, you shouldn’t hang around as some providers have already stopped offering some of their Child Trust Fund accounts.

The Children’s Mutual, for example, one of the largest providers of Child Trust Funds, has stopped taking new business on all but its standard stakeholder accounts.

What are the alternatives if my baby is due next year, after the vouchers are phased out altogether?

If parents are not currently using their annual individual savings account (ISA) allowance, they could use this to build up savings on behalf of their children, thus avoiding any income or capital gains tax liability. You can save up to £10,200 in ISAs this year.

If you are investing over a long-term period, then historical evidence shows that equities tend to produce better returns than money held in deposit accounts, so a stocks and shares ISA could be a good option.

However, these are risky, so you will need to be prepared for your investments to go down as well as up. Always seek professional independent financial advice before investing.

Remember too that children can’t own shares or collective investments until they are 18, so they need to be owned by an adult or trust for the child’s benefit.

This is usually done through a ‘bare trust,’ a simple trust that allows you to gift money to your child, or through a ‘designated account’, where the money is still yours but designated to your child.

What if I don’t want to take any risks with my money?

One option might be to consider a high interest regular savings account. Norwich & Peterborough Building Society’s Family Regular Saver account, for example, pays a competitive 5% annual interest, including a 3% bonus, but you only get this rate if you put money into the account every month.

If you don’t do this, the rate drops to 2%. The maximum you can pay in is £250 a month, and the minimum monthly payment is £1. One penalty-free withdrawal is allowed each year, but if you want to make further withdrawals you will lose the bonus and the rate will again drop to 2%.

Alternatively, Halifax’s Children’s Regular Saver account pays an impressive fixed 6% annual interest for a year. You can pay in a minimum of £10 a month and a maximum of £100, but bear in mind you may need to move your money after the fixed rate term is up if you want to continue to earn a competitive rate of interest.

If you’d rather go for a variable rate account, Northern Rock’s Little Rock Instant Access account pays young savers 3% interest a year. Chelsea Building Society’s Ready Steady Save account pays 2% and both these accounts can be opened with £1.

Alternatively, Chorley & District Building Society’s Foxley Fund account pays 2.9%, again on a minimum investment of £1. This account can be operated by post or in branches.

Whichever savings route you choose for your children, putting a little a bit away each month while they are young is likely to make a big difference to their lives later on.

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